Wednesday, March 31, 2010

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial disaster.

By fully assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, thrust taxpayers into an abyss of insolvency with one mighty shove.

The following charts (click for larger ultra-dynamic and surf-able chart) show what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

Notice that despite all the government gimmicks and manipulation the level of delinquency at these two mortgage giants continues to mount.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage increased 3 basis points since the last week to 5.04% while the purchase application volume increased 6.8% and the refinance application volume declined 1.3% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures, record low interest rates and the massive government housing tax gimmick, the purchase application volume now sits near the lowest reading seen in over ten years.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

It’s important to remember that the CSI data is lagged by two months and that today’s results represent the trend of prices paid from home sales closed between November-January of 2009.

Now that the strongest selling months have been reported, look for all remaining CSI releases until early spring to continue to indicate notable price weakness coming from typical seasonal declines as well as extra-seasonal declines as a result of reduced demand from activity that was “stimulated” forward into the summer and early fall by the tax sham.

Also, looking at the 1990s-era comparison charts below its obvious that even after the main downward thrust has been reached, the housing markets have a long tough slog ahead with the ultimate bottom likely many years out…. Or if we are currently experiencing the Japanese model… decades out.

Further, is important to remember that the 90s housing recovery played out against the backdrop of a truly unique period of growth in the wider economy fueled primarily by novel and ubiquitous technological change (cell phones, internet, personal computers, telecommunications, etc).

Today, we may not be so lucky.

The 10-city composite index declined 0.04% as compared to January 2009 while the 20-city composite declined 0.70% over the same period.

Topping the list of regional peak decliners was Las Vegas at -55.78%, Phoenix at -50.86%, Miami at -47.19%, Detroit at -42.47% and Tampa at -41.96%.

Additionally, both of the broad composite indices show significant peak declines slumping -30.23% for the 10-city national index and -29.63% for the 20-city national index on a peak comparison basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a month-to-month basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

The current Radar Logic 25 MSA Composite data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as January 25 indicates that the price bounce seen as a result of the government's housing tax credit peaked in August and has since steadily trended down showing a 2.9% decline since December 2009.

Look for tomorrow's S&P/Case-Shiller home price report to reflect essentially the same trend showing a notable monthly decline as prices head for another strike at last years cycle low.

The interplay between the want of a reasonable return on cash-based savings and the need for safe harbor from financial crisis is distinctly present in this series which currently appears to be suggesting that while the general level of financial stress is still elevated, the minuscule return is driving flows out of money funds.

Where the outflows are generally being driven to, of course, cannot be perfectly known but stocks, real estate, popular commodities and simply working capital for financially stressed households are likely a reasonable assumption.

High rates of delinquency and default on business and consumer loans are working to tighten direct commercial lending overall while government sponsored lending activities, such as is carried out through Fannie, Freddie, Ginnie, Sallie and FHA, work to prop specific lines of lending.

Commercial banks are, in a sense, refusing to generally lend unless they have a government guarantee.

On a year-over-year basis real GDP was just barely positive coming in at just 0.06% while the quarter-to-quarter non-annualized percent change was 1.36%.

It's important to recognize that the majority of this growth is the result of inventory restocking, growth in fixed non-residential equipment and software investment as well as a notable growth in exports of goods.

Change in private inventories alone accounted for 4.39% of the percent change in real GDP.

Residential fixed investment was revised down to an annualized increase of 3.8% but likely still has further downward revisions to come in benchmark releases.

Thursday, March 25, 2010

Today’s jobless claims report showed another decline to initial claims with a subtle flattening shaping up while also indicating a similar trend to the continued claims series while continued claims including extended benefits appear to be continuing to mount.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 5.7 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.4 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 11 million people on state and federal unemployment rolls.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

The following chart shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967.

Wednesday, March 24, 2010

Today’s new home sales results offers even more confirmation that the government sponsored housing bounce of 2009 was essentially a massive tax payer funded suckers rally.

Induced by a relatively large tax gimmick, artificially (quantitatively eased) low interest rates and a climate of foreclosure mitigation, endless unemployment insurance extensions and other “stimulative” measures, many naive market participants likely concluded that 2009 marked the bottom of the great housing decline.

Yet, the real “organic” market forces are not tricked by such tomfoolery.

New home sales have now broken well below the supposed housing “bottom” of early 2009 and likely lead other important measures such as existing home sales, home prices and the new residential construction measures.

So, while popular media and other interested parties continue to spin a tale of a “stabilizing” housing market their story is beginning to look both inaccurate and self serving.

As we move into the spring market don’t be surprised if the second (and final) expiration of the housing tax credit drives another significant spike in home sales but as we see now the effects are likely to be only temporary.

Malinvestment in a market as large as the residential housing market of the United States likely cannot be fundamentally cleared through government subsidy.

In fact, the latest data indicates that at 308K annualized units, new home sales is now at the lowest level seen in seen since records have been kept (47 years) and 8.88% lower than the previous lowest low seen in September of 1981.

New single family home sales dropped 2.2% since January and 13% since February 2009 while median prices have increased 5.15% since February 2009.

Additionally, the monthly supply increased to 9.2 months while the median months for sale jumped to 14.4 months.

So much for the “end of the housing decline”…

Although many in the traditional media and elsewhere have been treating the government sponsored bounce seen since March 2009 as if it were a solid indication that the bottom was in, those who have followed this dataset for years know that one needs to rely on a mix of multiple metrics along with healthy dashes of skepticism and hunch in order to glean out the true trend.

Needless to say, these must be awfully disappointing numbers for many.

The bounce in new home sales seen throughout 2009 was an authentic increase in overall activity but not in “organic” activity… How would new home sales have trended without the government propping?

In any event, the “real” bottom was NOT IN during 2009, as I had correctly predicted in prior posts, and the level of new home sales is now at a low for this cycle.

The following charts show the extent of sales decline (click for full-larger version)

Tuesday, March 23, 2010

As I have noted in prior posts, the S&P/Case-Shiller sale pair counts series are, to my knowledge, the best “organic” existing home sales series as can be found.

The methodology employed by S&P vets out “flips”, new construction and even most distressed sales providing them with a solid base of true “arms-length” sales for which to base their more popular home prices series on.

As has been widely reported, some 30%-40% of all existing sales (as reported by the NAR) are distressed properties resulting in a significant gap between the trends in new and existing home sales.

Existing home sales have been essentially propped up by the high volume of distressed properties resulting in a poor indicator of the true trends for non-distressed typical existing home sales.

Yet, looking at the chart (click for super dynamic full-screen version) which compares the seasonally adjusted new home sales series and the non-seasonally adjusted S&P/Case-Shiller Composit-10 sale pair count series, both smoothed with a 12 month simple moving average, you can see that there is a great degree of correlation between the two trends.

Further, although both series clearly indicate that the worst of the home sales decline is likely behind us, it’s important to recognize that the formation of the “bottom” during the 90s-era housing bust took roughly two years during which time existing home sales continued to slowly trend down.

A bottom to our current housing cycle will not be defined by a single data series on a single month but instead will be a long slow slog whereby multiple market factors clear in a cumbersome "fits and starts" manner.

As for prices, the February release showed a 2.1% decline on a year-over-year basis as well as resulting in now 40 consecutive year-over-year declines.

It’s important when reflecting on the sales results to consider that over 72.3% of all sales were for properties priced below $250,000 while just over 7.3% were priced at or above $500,000.

Clearly, today’s results unequivocally indicate that the government’s tax gimmick drove a surge in "lemming style" demand into the fall of 2009, bringing a renewal of speculative animal spirits, but with an effect that appears to have been largely temporary.

Realtor's are expecting a second great surge of "buying" activity as we near the second tax gimmick expiration this spring but as today's results suggest, these tricks are likely creating very little additional demand and simply shift demand forward as "buyers" jump for the government tax carrot... a carrot likely dangled over an abyss of asset price deflation.

The following charts (click for full-screen dynamic version) shows national existing single family home sales, median home prices, inventory and months of supply since 2005.

The BLS considers a mass layoff event to be a condition where there are at least fifty initial claims for unemployment insurance originating from a single employer over a period of five consecutive weeks.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national is expanding at its historical trend rate while a negative value indicate below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

It’s important to note that at -0.39 the current three month average index value is indicating very weak growth after several recent months of intermittent recessionary and near recessionary growth.

The "personal consumption and housing" component is continuing to show very weak results and at -.45, is at a level only marginally better than the worst levels seen this cycle.

The following charts (click for full-screen interactive zoom-able version) plot the national activity index as well all of its four components.